Apple’s (AAPL) annual unveiling of its refreshed lineup of iPhones and iPads came and went on Wednesday, leading nonplussed investors to chip away at the AAPL stock price by about 2%. The general consensus: There seems to be a dearth of innovation at the once wildly innovative firm.
As of Friday’s early morning trading, shares of the tech behemoth are now up just 1.6% this year. While better than the S&P 500’s 5.5% loss, it’s not much for a company that has delivered 10-year returns of more than 1,400%.
And while I agree with the general takeaway (the iPhone 6s and 6s Plus hardly constitute product breakthroughs, and a $99 iPad stylus is downright dumb), there was one positive development from the Apple event that investors are overlooking.
And frankly, it could do wonders for AAPL stock if the strategy works.
The iPhone Upgrade Program
Recently, there’s been a shift in the way wireless carriers do business. Previously, carriers would heavily subsidize smartphones, specifically the iPhone, by allowing customers to buy them for $200 with a 2-year contract. The remaining $500 or so was eaten by the carrier.
Gone are those subsidies. Verizon (VZ), T-Mobile (TMUS), AT&T (T) and Sprint (S) are all pushing iPhone installment plans, where users pay a monthly fee, usually between $20 and $30 a month for around two years.
But while AAPL still relies on carriers for the vast majority of its iPhone distribution, it would still prefer for its customers to buy through Apple directly.
So, on Wednesday, Apple announced a clever new way to buy an iPhone through its own iPhone Upgrade Program. Here’s how it works: Sign a 24-month agreement to pay a monthly fee, and you’ll get one of the brand spankin’ new iPhones with AppleCare+ protection. Better yet, after 12 payments, you can trade in your old iPhone for the new one and start another iPhone Upgrade Program.
There are three aspects to this new plan that make it a potentially huge catalyst for AAPL stock:
- The upgrade cycle just accelerated: Instead of riding your iPhone 4 for three years and waiting until your phone is cracked and unusable before upgrading, consumers now have the motivation to upgrade to the newest models every year like clockwork.
- The phones are unlocked, meaning AAPL won’t make you commit to a two-year contract with a carrier, and you can freely switch between carriers of your choosing at will. That’s a big deal!
- You’ve got to physically go into an Apple store to buy the phone and start the plan, which gives AAPL an opportunity to upsell and cross-sell customers who might not otherwise be intending to buy that $1,079 iPad Pro with a $99 Apple Pencil.
The plans start at $32.41 per month for the 16GB iPhone 6s model, and go all the way to $44.91 per month for the 128GB iPhone 6s Plus version.
By decreasing its reliance on carriers for distribution and bringing customers directly into the Apple store, AAPL opens up new ways to further boost its insane revenues. And with about two-thirds of its revenue still coming from the iPhone, an accelerated upgrade cycle should do wonders for the stock price.
Trading at just 12 times forward earnings, it’s tough not to like AAPL stock at these levels.
As of this writing, John Divine was long shares of AAPL stock. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.
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